Option Heresy is Profitable
03/14/2014 9:34 am EST
Option expert Michael Thomsett details his unusual option strategy that doesn't include volatily analysis and shares why he has come up with this methodology.
SPEAKER: I'm here with Michael Thomsett, author of Getting Started in Options, now in its ninth edition…
SPEAKER: …and we're talking about volatility analysis. I understand that it plays no role in your analysis whatsoever.
MICHAEL: No, it does not. My technique is to study the chart of the underlying security, and look for reversal signals in confirmation, and I trade almost strictly on that basis, essentially swing-trading with options, and what that does is it allows me to go in and out short-term and to create short-term income. In 14 months on my virtual portfolio, I've netted about $70,000 using that technique.
SPEAKER: Why do you think that technique is more successful than, say, some other technique that could employ volatility analysis?
MICHAEL: Well, what I found out about volatility is that it's so inconsistent, and I just learned the hard way to not rely on it, especially during the last month of the option's life, where volatility becomes completely unreliable because of what's generally called volatility collapse, where the time value is falling so fast that you can't really read the volatility very accurately in most cases.
SPEAKER: Is there any circumstance under which you would say that volatility analysis is a useful element or strategy?
MICHAEL: Oh, it's very useful, especially if it moves in the extreme, especially when it gets high and an option gets very rich. You can expect when an option gets very rich for the statistical reality to set in and for that to return back to normal. If you're selling options and the volatility goes very high, that's a good time to sell, expecting it to return back into normal range very soon.
SPEAKER: Well, Michael, that's a unique approach for options strategy. Thank you very much.
MICHAEL: It's heresy, yes. Thank you.
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